Why Facebook's Mobile Ad Network Makes So Much Sense

Facebook (NASDAQ: FB) , which had previously focused its sales efforts on selling ads on its own site and apps, plans to launch a mobile ad network.

The network could launch as soon as later this month, according to re/code, which said that the social media network will announce the plan at its F8 developer conference in San Francisco on April 30.

"Facebook will pitch the ads to publishers and developers as a way to leverage the social network's vast database of user information for better ad targeting," the technology site reported,

Facebook benefits by being able to offer advertisers an even broader platform and the company might take some business from rival Google's (NASDAQ: GOOG) mobile ad network.

Why is Facebook doing this now?

Facebook had to get is own mobile advertising house in order before it could consider creating a network. Though the company struggled with mobile early on, it clearly turned the corner in the fourth quarter of 2013 -- mobile advertising revenue represented approximately 53% of advertising revenue for that quarter, up from approximately 23% of advertising revenue in the prior year. With overall ad revenue for the quarter at $2.34 billion (a 76% increase from the same quarter last year), that means the company took in $1.24 billion in mobile advertising.

A large piece of that revenue -- maybe 50% or more -- comes from "app-install" ads, re/code reported. Those are ads that prompt users to download new apps or use apps they already have installed. This was not originally expected to be a large part of the site's revenue model, but it has proven incredibly successful and it's a model that will likely be part of the company's ad network strategy.

Facebook already controls a decent percentage of the overall mobile ad market -- which Gartner predicted was $13.1 billion in 2013 -- and has the power to grow that number if it monetizes its newly purchased WhatsApp messenger service by adding ads. Creating a mobile ad network opens up a large chunk of the rest of the mobile ad world to Facebook and allows it to take on Google's AdMob mobile network.

Google did not break out revenues for its mobile ad network specifically, but operating an ad network (across mobile and non-mobile) platforms has been huge for the company. In the first quarter of 2014 Google's partner site generated $3.4 billion -- 22% of total revenues -- which represented a 4% increase over the first quarter of 2013. While it might be hard for Facebook to take on Google's entrenched position in the non-mobile ad world, it's still relatively early in the mobile game.

How big is the mobile ad market?

Global mobile advertising spending is forecast to reach $18 billion in 2014, up from an estimated $13.1 billion in 2013, according to Gartner. The market is expected to grow to $41.9 billion by 2017.

One of the biggest factors inhibiting growth is a lack of available inventory to sell. By launching a network Facebook will get access to inventory beyond what its own mobile products generate.

"Over the next few years, growth in mobile advertising spending will slow due to ad space inventory supply growing faster than demand, as the number of mobile websites and applications increases faster than brands request ad space on mobile device screens," said Stephanie Baghdassarian, research director at Gartner. "However, from 2015 to 2017, growth will be fueled by improved market conditions, such as provider consolidation, measurement standardization, and new targeting technologies, along with a sustained interest in the mobile medium from advertisers."

Facebook already has critical mass

Launching a mobile ad network for Facebook is easier than it would be for nearly any other company. Because Facebook itself generates so many potential mobile ad impressions (as do Messenger, WhatsApp, and Instagram) the company already has an enormous amount of page views to sell. And with $1.24 billion in mobile advertising already on board Facebook clearly has relationships with advertisers. The company also has a virtual copy of the micro-ad model Google uses for its AdSense service, which allows anyone with even the tiniest of budgets to spend it with Google.

In launching a mobile ad network Facebook won't be starting from scratch. The company should be able to leverage existing relationships to grab a bigger share of the ad pie. If soft drink company A is already spending big with Facebook, why wouldn't it increase its buy if the company can offer desirable impressions on network sites? Similarly if individual users are buying ads on Facebook's sites and mobile platforms why wouldn't they consider extending their reach?

A Facebook mobile ad network just makes sense and it should be a success that continues the company's tremendous mobile ad growth.

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Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google-Class C Shares. The Motley Fool owns shares of Facebook and Google-Class C Shares. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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